What's Next For Massachusetts?

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FILED JANUARY 1, 2010

Dear Client:

In a victory for wineries and direct shippers, the 1st Circuit Court of Appeals ruled in favor of a lower court decision on Thursday that a Massachusetts volume cap is unconstitutional because it discriminates against out-of-state wineries. [Ed note: You can view our coverage here]. The state is thus enjoined from enforcing its law that prohibits wineries producing more than 30,000 gallons from shipping if they have a wholesaler in the state. On its face it appears that wineries across the country can now ship to Massachusetts but other regulations may get in their way. So what now?

THE NEXT STEP for Massachusetts is to change their law “so that all wineries, not only in California but across the nation that produce more than 30,000 gallons will have an opportunity to fulfill the wine choices of Bay State residents," Paul Kronenberg, president of FWC, told ShipCompliant Blog.

ShipCompliant points out that the capacity cap was not the only thing hampering out-of-state wineries from shipping direct. “The consumer aggregate volume limit provision and, more importantly, the requirement that carriers obtain a permit for each of their delivery trucks have been in some ways just as problematic for wine consumers,” wrote Jeff Carroll, vp of Compliance.

It turns out that FedEx and UPS have both chosen not to ship out-of-state wine to Massachusetts residents because of the delivery vehicle permit system. Although the state is now technically open for business, Jeff doesn’t expect FedEx or UPS to change their stance following this decision.

The aggregate volume limit restricts the delivery of wine to about 26 cases per consumer per year for all wineries. This means wineries must keep track of the amount of wine each Massachusetts consumer has purchased from all wineries across the country. Obviously this is next to impossible and therefore acts as a huge deterrent for wineries.

The state would need to pass legislation that eliminates the consumer aggregate volume limit and changes the delivery vehicle requirements in order to be truly open.

FAMILY WINEMAKERS OF CALIFORNIA chairman Jim Gullett said in a statement: "This case was extremely important because it acknowledges that post-Granholm discriminatory laws like production caps cannot pass legal muster. We're gratified the court affirms the statute’s unconstitutionality.”

Tracy Genesen, lead attorney with Kirkland & Ellis on the case, said: “Today’s decision is a milestone for wineries and consumers in breaking down barriers to discriminatory interstate commerce. The 1st Circuit Court of Appeals concluded that the Twenty-first Amendment does not grant states the authority to enact facially neutral but discriminatory wine laws that would otherwise violate the Commerce Clause.”

Now we await a decision by the 9th Circuit Court of Appeals: will it uphold a lower court ruling that said Arizona has the right to enforce volume caps and require face to face transactions? If so, the two appellate courts would be in conflict, which could ultimately lead to a hearing by the Supreme Court. The outcome remains to be seen.

VIRTUAL RETAILER VINFOLIO ENTERS “ASSIGNMENT” TO PAY DOWN DEBT

The founder of Vinfolio, a San Francisco based online wine store, announced on his blog that the company entered an “Assignment for the Benefit of Creditors” on Friday evening, January 15. This state-level insolvency process is an alternative to filing Chapter 7 or Chapter 11 bankruptcy. It allows the assignor/debtor to transfer all or most of their property to a third-party/assignee that will apply money received to pay down debt.

Founder Steve Bachman wrote that “it is important for you to know that key employees have been retained and our operations continue as we undertake this process...I’d like to apologize to you for this unexpected development and ask our loyal customers and users to be patient during the Assignment.”

Although the company has experienced “three years of very rapid growth,” said Steve, “Vinfolio experienced a much more difficult sales environment during 2009. A few weeks ago, we found ourselves in need of additional capital on a very near-term basis. The company investigated several options but new capital could not be obtained on a necessarily compressed timetable.”

Also on Friday, a group led by Jon Moramarco, the managing partner of BW 166 LLC, acquired the secured debt of the company. They issued a guidance to the Assignee that says: “The Vinfolio business is a unique and valued asset to the community of wine collectors and wine enthusiasts. We want to see the business continue its mission and have acquired the secured debt to help align everyone’s (creditors’, customers’, employees’, users’) interest in this outcome.” They wish to “preserve the goodwill” of Vinfolio’s customers and users by funding Vinfolio “in the near term while the Assignment process is ongoing.” The secured creditor is also waiving any rights to funds from the sale of Marketplace and fixed priced auction items from January 1 “and has asked that these funds be paid to the sellers in those sales as soon as practical.” The secured creditor “only have security in the assets owned by the company, and not in wines offered through the Marketplace or fixed price auctions, or wines stored by third parties with the business.”

In September Vinfolio announced it had raised $4.5 million to fund an expansion in Asia. It had also raised $6.1 million in previous rounds of financing (both debt and equity).

WSD BRIEFS:

IOWA is the latest state to be sued for alleged post-Granholm Commerce Clause violations. OakGlenn Winery, located in Missouri, is suing Iowa to allow it to ship directly to consumers. Iowa does not allow out-of-state wineries to ship direct while allowing in-state wineries to do so. The suit isn't surprising as Granholm settled this very complaint. The suit seeks a declaratory judgment.

BROWN-FORMAN laid off 12 employees at Fetzer Vineyards on Friday after deciding to outsource its trucking department to save money, reports The Press Democrat. They include 9 truck drivers, 2 mechanics and 1 manager and will be paid through January 31. Cherokee Freight Lines will take over January 19.

US WINERIES REACH 6,223. According to the Wine Business Monthly database, the US gained 122 new wineries last year, reaching a total of 6,223 as of November 2009. This total is made up of 5,304 bonded wineries and 919 "virtual wineries." Bonded wineries, which are licensed by the TTB, grew 6% in 2009.

BROWN-FORMAN is donating $100,000 to the American Red Cross to assist in relief efforts in Haiti. B-F will also match employee donations to the American Red Cross up to $20,000, which means the company and its employees will contribute as much as $140,000 to the Haitian Relief efforts.

VSPT WINE GROUP, which is the second largest Chilean wine exporter, shipped over 1 million cases into the US in 2009 with the merger of Viña Tarapacá. Notable growth came from Viña San Pedro, which grew sales 35%.

Until tomorrow, Megan

“It is as hard to see one's self as to look backwards without turning around.”Henry David Thoreau

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